News Tone, Investor Sentiment, and Liquidity Premium

41 Pages Posted: 24 May 2021

See all articles by Jun Liu

Jun Liu

Tilburg University - TIAS School for Business and Society

Kai Wu

Central University of Finance and Economics (CUFE) - School of Finance

Ming Zhou

Central University of Finance and Economics (CUFE)

Fujing Jin

Central University of Finance and Economics (CUFE); Macquarie University, Macquarie Business School

Date Written: May 22, 2021

Abstract

Using textual media tone as investor sentiment measure, we find that in China, firms with a more pessimistic (optimistic) news tone lead to more (less) active trading, higher (lower) depth, or spread. This negative (positive) effect of investor sentiment on trading activity or stock liquidity is robust to controlling other firm characteristics and macroeconomic conditions. We observe that the liquidity premium is significant in China, which is more pronounced across firms with an optimistic sentiment. Additionally, we decompose liquidity into the sentiment-driven and non-sentiment-driven (NSD) components and find that the NSD premium is declining. This decline stems from a higher sensitivity of sentiment to liquidity. Besides, we also find that NSD premium performs better following high economic policy uncertainty and low growth of margin trading and stocks with low shareholdings of institutional investors.

Keywords: investor sentiment, liquidity, expected stock returns

JEL Classification: G12, G14, G32

Suggested Citation

Liu, Jun and Wu, Kai and Zhou, Ming and Jin, Fujing, News Tone, Investor Sentiment, and Liquidity Premium (May 22, 2021). Available at SSRN: https://ssrn.com/abstract=3851089 or http://dx.doi.org/10.2139/ssrn.3851089

Jun Liu

Tilburg University - TIAS School for Business and Society ( email )

Warandelaan 2
TIAS Building
Tilburg, Noord Brabant 5037 AB
Netherlands

Kai Wu (Contact Author)

Central University of Finance and Economics (CUFE) - School of Finance ( email )

Beijing
China

Ming Zhou

Central University of Finance and Economics (CUFE) ( email )

39 South College Road
Haidian District
Beijing, Beijing 100081
China

Fujing Jin

Central University of Finance and Economics (CUFE) ( email )

39 South College Road
Haidian District
Beijing, Beijing 100081
China

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

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